Bank of Canada cites Trump tariff threats in decision to cut key interest rate to 3%

 Bank of Canada governor Tiff Macklem said following Wednesday’s announcement that there is not much central bankers can do to offset the economic consequences of a trade war. 

Bank of Canada governor Tiff Macklem is seen in a file photo.

Adrian Wyld/The Canadian Press file photo

U.S. President Donald Trump’s 25-per-cent tariffs are still nothing more than a threat, but they’re already forcing policymakers to prepare for the worst-case scenario. 

The Bank of Canada delivered a quarter-percentage-point cut to its key interest rate on Wednesday, emphasizing Trump’s tariff threat in the first rate announcement of the year. 

“There’s no doubt that weighed on our decision,” Bank of Canada governor Tiff Macklem said in a press conference. 

The bank lowered its policy rate to three per cent from 3.25 per cent in line with experts’ expectations, according to a Bloomberg survey of 22 economists. 

If the U.S. broadly imposes tariffs on Canadian goods — which might come as soon as Saturday — the Canadian economy could be pushed into a recession due to lower demand for exports, economists say. This would prompt the central bank to boost economic stimulus by cutting rates further.

At the same time, if Canada decides to retaliate, it would increase prices for Canadian consumers, possibly leading the bank to consider rate pauses or even hikes going forward. 

Macklem said the bank is evaluating possible responses to different scenarios, but ultimately, there is not much central bankers can do to offset the harsh economic consequences of a trade war. 

“This is a complex shock for monetary policy because growth goes down and inflation goes up, and we can’t lean against lower growth and higher inflation at the same time,” Macklem said. “So we’re going to have to weigh which one is bigger.” 

Without tariffs, central bankers expect inflation to remain close to the two per cent target and economic growth to pick up. 

The report also includes a “severe” hypothetical scenario. It models a world where the U.S. imposes permanent tariffs of 25 per cent on all imported goods, including from Canada, followed by an equal retaliation from trading partners. 

In this world, real Canadian gross domestic product would take a 2.5 per cent hit in the first year, while inflation would generally rise, reflecting a weakened Canadian dollar. 

“Next steps clearly are dependent on what unfolds on the trade front,” said Porter. “We suspect while the bank may initially respond cautiously to a trade war, eventually it would be compelled to cut much more than the market currently expects.” 

https://www.thestar.com/business/bank-of-canada-cites-trump-tariff-threats-in-decision-to-cut-key-interest-rate-to/article_cb7e9ba0-dd96-11ef-9b5b-330ec95f7d8d.html